Why Bill Ackman Likes Nike (NKE) and How He Plans to Turn Around His Struggling Fund

From being on top of the investing world in 2014, it’s been a relatively short and hard fall for Bill Ackman‘s Pershing Square, the multi-billion dollar hedge fund that owned $16 billion in equities at the end of 2014, a year in which it returned just over 40%.

However, three losing years have followed, each of which saw Pershing Square finish close to 20 percentage points behind the S&P 500, with the fund being dragged down by failed investments in companies like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Chipotle Mexican Grill, Inc. (NYSE:CMG).

In light of the hedge fund’s dreadful performance of late, the billionaire money manager recently cut nearly 20% of his staff and is determined to take a lower public profile while immersing himself in the work of successfully investing his clients’ money. Pershing Square’s latest investor letter also emphasized that the fund will stick to its core investing principles, suggesting that it may have strayed from those in recent years, and stating that the stocks that it purchased in 2017 were aligned with those principles. Among those principles are finding companies with formidable barriers to entry and those with minimal capital market dependency.

One of those new stocks is Nike Inc (NYSE:NKE), which Pershing Square opened a position in during the fourth quarter of last year. We’ll take a look at Ackman’s thoughts on that company and two other prominent positions in this article, based on the fund’s 13F filing released yesterday.

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Nike Inc (NYSE:NKE)

How Many Shares Pershing Square Owns: 5.84 million

How Much Money Pershing Square Has Invested in the Stock: $365 million

About Nike Inc (NYSE:NKE): The sports apparel and equipment company is a global behemoth, with $8.6 billion in sales in the second quarter of its fiscal year 2018 ended November 2017. It also easily topped earnings expectations of $0.40 per share, delivering $0.46 per share.

However, while international expansion picked up speed in the quarter, the North American segment is struggling against robust competition from the likes of Adidas, and a rapidly consolidating wholesale marketplace. Declining footwear sales accounted for the bulk of Nike’s shrinking North American revenue (down by 5%) during a quarter in which it was announced by the NPD Group that Nike’s Air Jordan sneakers have been supplanted in popularity by Adidas’ offerings.

Why Bill Ackman Likes Nike Inc (NYSE:NKE): With Nike hovering around all-time highs, the timing doesn’t seem ideal for Ackman to jump into the stock. However, the billionaire investor sees a lot of growth potential for the company that could translate into those all-time highs eventually being a miniscule remnant of the past.

Among the things that Ackman sees as positives for Nike are the company’s iconic brand, its potential for margin growth expansion through improved manufacturing processes, and its unmatched marketing endeavors. Ackman believes Nike will continue to achieve annual revenue growth in the high-single-digit range, citing the company’s international expansion and pricing power.

On the next page we’ll take a look at two other stocks that the billionaire investor loves and check out his latest thoughts on them.

Mondelez International Inc (NASDAQ:MDLZ) 

How Many Shares Pershing Square Owns: 23.26 million (+9.33 million in Q4)

How Much Money Pershing Square Has Invested in the Stock: $995 million

About Mondelez International Inc (NASDAQ:MDLZ): The food and beverage giant pulled in $6.97 billion in revenue in the fourth quarter and diluted EPS of $0.57, beating estimates by a penny. Mondelez doesn’t expect much organic net revenue growth this year, as it pegged that number at just 1-2%. It does expect much stronger adjusted EPS growth of somewhere in the double-digit range. However, there is reason to hope that growth may be stronger than forecast, particularly in emerging markets, where sales picked up steam last quarter.

Among Mondelez’s most popular brands are Chips Ahoy! and Oreo cookies, Toblerone and Cadbury chocolate, and Trident and Dentyne gum. Mondelez is increasingly turning to healthier snacking products as it tries to keep up with the shifting tastes of health-conscious consumers. In 2015, Mondelez announced that it was aiming to have 50% of its snacks portfolio consisting of healthy snacks by 2020. Some of the company’s recent efforts in that regard include Good Thins baked chickpea crackers and Vea quinoa crisps.

Why Bill Ackman Likes Mondelez International Inc (NASDAQ:MDLZ): Aside from Nike, Mondelez was the only other stock that Pershing Square purchased shares of during the previous quarter, 9.33 million in all. Ackman believes the stock will rebound in 2018 after a disappointing 2017 that was weighed down by fears over the company’s transition to a new CEO and the state of the grocery market.

Ackman believes the shares are currently undervalued, trading at just 18-times the fund’s 2018 earnings estimates for the company. That means it’s trading at a discount to the S&P 500 despite having what Ackman describes as a high quality business and solid growth opportunities. It’s also trading at about a 15% discount to its historical multiple. Ackman believes the company is being unfairly valued as if it were a “center-of-plate” packaged foods company (which are facing stronger secular headwinds), when in fact Mondelez is primarily a provider of snacks (it was Kraft’s old snack division after all).

Restaurant Brands International Inc (NYSE:QSR)

How Many Shares Pershing Square Owns: 26.5 million

How Much Money Pershing Square Has Invested in the Stock: $1.63 billion

About Restaurant Brands International Inc (NYSE:QSR): Restaurant Brands is a Canadian holding company that was created in 2014 after the merger between Burger King and Tim Hortons. The company grew further last year through the purchase of Popeye’s Louisiana Chicken. In the fourth quarter, those restaurants managed $1.23 billion in revenue and adjusted EPS of $0.66, the latter figure beating estimates by $0.09. Burger King was the strongest performer among the trio, with its value bundling being credited for strong same store sales growth of 4.6% in the quarter.

However, sales have been sluggish at Canadian coffee chain Tim Hortons for over a year, and over half of the brand’s franchisees have joined the Great White North Franchisee Association in the last year, a group that is raising concerns over how Restaurant Brands is forcing them to operate. A large minimum wage hike in Ontario, Canada that went into effect on January 1 has lead to incensed franchisees in the province, who say RBI has not allowed them to raise the price of their menu items to help them offset some of the wage increases. That lead to some franchisees clawing back employee benefits like paid breaks, which in turn lead to some customers boycotting the chain for “mistreating” its employees. However, multiple analysts believe the impact has been overblown and that Tim Hortons isn’t showing any new signs of weakness so far in 2018; in fact, checks are showing that it could be outperforming its early-2017 numbers.

Why Bill Ackman Likes Restaurant Brands International Inc (NYSE:QSR): Restaurant Brands was Ackman’s top performer in 2017 and despite the stock’s price appreciation last year (gains of nearly 30%), he remains bullish on it for 2018. Ackman believes the stock is still cheap relative to peers and based on the stock’s intrinsic value, with shares trading at 21-times the fund’s 2018 free cash flow per share estimates for the company, about four percentage points cheaper than peers.

Ackman was particularly impressed with the strong performance of Burger King last year, which achieved net unit growth of 6% and raised its EBITDA margins by 250 basis points. Ackman stated in the second-half of last year that he believes Restaurant Brands can maintain a free cash per share growth rate in the mid-to-high teens for the foreseeable future.

Disclosure: None